Banks to lose big in Argentina's devaluation
By Brian Winter
BUENOS AIRES, Argentina, Jan 4 (Reuters) - Banks may be the biggest losers in Argentina's imminent currency devaluation, as some face possible collapse under the weight of bad loans and scant hope of returning deposits intact.
Some kind of bailout will probably be needed to ease the pain of the expected devaluation of Argentina's peso by 30 percent or more after a decade in which it has been pegged to the U.S. dollar, bankers and analysts said on Friday.
``We'll see some banks collapse, especially smaller ones,'' said Robert Lacoursiere, a banking analyst for Lehman Brothers in New York. ``It's inconceivable that the system could continue functioning without some kind of rescue bailout.''
International pressure will be high to find a way to save Argentina's embattled financial system, since many foreign banks have heavy stakes in Latin America's third largest economy. For instance, Spain's biggest bank Santander Central Hispano had $7.1 billion in loans outstanding and $6.1 billion in deposits at the end of November.
The currency peg led Argentines to rack up roughly 80 percent of private debt in dollars while most earn their salaries in pesos. But the peg is now near rupture as a brutal recession in its fourth year spirals out of control.
Rather than unleash a wave of bankruptcies in a frustrated nation whe Du Du* DI IN DI !? GU? IN?oppled two presidents in the last month, the new government has said it aims to convert dollar debts into devalued pesos.
That pledge, along with new President Eduardo Duhalde's promise to return Argentines their deposits in dollars, could ravage the balance sheets of banks already under heavy stress.
``The government has decided it's easier to destroy the banks than try to save them,'' said a top executive at one of Argentina's largest banks. ``The details are still unclear, but I doubt the financial system will survive this unharmed.''
It was for many a ``worst-case scenario'' for Argentina's financial system as the government has already defaulted this week on part of its $141 billion public debt.
``TSUNAMI'' OF BAD LOANS
After the devaluation, expected as soon as this weekend, Argentines will likely rush to withdraw as much cash as they can. The government imposed $1,000-per-month emergency caps on withdrawls last month to head off a bank run, but analysts said those caps must eventually be lifted.
Banks will be hard-pressed to return the cash. Of about $67.32 billion deposited in Argentine banks, $46.77 billion is denominated in dollars or other foreign currencies, according to Central Bank figures.
Banks that manage to stay afloat must then reconcile a jump in liabilities -- 30 percent or greater in case of a devaluation of that size -- while their assets stay constant.
``It would wipe out banks' capital many times over,'' Lacoursiere said. ``Even if they survive those initial shocks, eventually you have a tsunami of bad loans coming due.''
Analysts said bad loan levels could triple. After Mexico's peso devaluation in 1994, more than half of loans in the private sector eventually went bad, Lacoursiere said.
Duhalde, the country's fifth president in a month, confirmed a devaluation on Friday. Top advisors have said he was mulling a peg of 1.30 or 1.40 pesos to the dollar, but in practice, the devaluation could be even more severe for banks.
The incoming treasury secretary said on Friday that Argentina would employ a dual exchange rate -- one fixed system established by the monetary authority and another floating rate for ``non-priority'' trade.
Some bankers said they did not yet know which of the two rates would be used in financial transactions. Some local media reported that banks would be forced to use the fixed rate, but economists had other ideas.
``Throughout Argentine history, the 'official' dollar has been used for foreign trade and the other rate for everything else,'' said Aldo Abram, economist for Exante consultancy.
Analysts said that with tension running high and memories of rampant hyperinflation that hit 5,000 percent in 1989, the floating peso could tumble 50 percent or more within a year.
``The consequences of a floating currency would be disastrous,'' another Argentine bank official said. ``It's just not realistic to think local banks could survive that.''
BAILOUT?
Some bankers and analysts suggested Argentina would try to snag a bank bailout from the International Monetary Fund. But relations have been icy with the IMF, which froze $1.3 billion of aid in December, citing state overspending.
There are doubts about how much the government will help the banks after Duhalde said on Friday he would end ``decades of an alliance between politicians and the financial sector rather than the productive sector.''
Something will have to give, and depositors may end up losing part of their savings.
``Despite the desire of Argentine depositors to get their frozen deposits back in dollars or in pesos worth $1, this will not be possible,'' ratings agency Moody's said in a report.
Moody's said deposits in dollars could be returned at a reduced rate in pesos, or turned into bonds and returned over a long period of time, as was done in Argentina in 1991.
Either way, the damage to Argentina's financial system will be deep and take years or decades to repair, analysts said.
``Without banks, you don't have an economy,'' said one Wall Street analyst. ``I don't know how either one will be able to survive with a devaluation like this.''
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